Why humans are the stupidest species on the planet

The Myth of the Invisible Hand: Why We Need the Guiding Hand of Government

The many zealous advocates of free-market policies, which can be summed up in the phrase, “Less government and more private enterprise in all domains of life will produce the greatest amount of material wealth and the best of all possible societies,”[1] are fond of repeating Adam Smith’s metaphor of the invisible hand, which he mentioned only once in his long work, An Inquiry into the Nature and Causes of the Wealth of Nations.

But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value. As every individual, therefore, endeavours as much as he can, both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain; and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it. (book 4, chapter 1)

It is truly astonishing how many grown, and supposedly educated, men and women have taken this marginal and anecdotal statement as a justification for selfish behaviour in the economic realm. Carried away by their exuberance, they have based the chimerical edifice of free-market capitalism on this slender and incomplete base – slender because it is only a metaphor, and incomplete because it fails to take into consideration some very important aspects and determinants of human behaviour. In several other essays, I have discussed the important facts that, first, what you see is what you know, and second, in the past, our species evolved in societies that contained very few people, usually less than several hundred members.[2] These two traits explain why, until recently at least, human beings have generally not been very good at organizing societies that contain many thousands or millions of inhabitants. Left to themselves, without any rules or imposed order, such large groups of people inevitably degenerate into chaos, anarchy, and extreme inequality. This is why the doctrine of anarchy – that government is unnecessary and unjust – is completely mistaken, for its advocates mistakenly assume that the unplanned social order that exists in small groups of people, where everyone knows, respects, and cares about everyone else, and where all the members have grown up observing the same models of behaviour, also exists in large groups, where it is no longer possible for everyone to know everyone else, and where people have grown up observing different models of behaviour. Moreover, it fails to take into consideration the harmful effects of contempt, which leads to divisions and distinct classes in any large group of people, and can lead to violence between groups whose members scorn or hate each other.

Experience has shown that large groups of people, meaning groups that contain more than a few hundred individuals, usually need rules and a system of punishment in order to maintain order, for otherwise all sorts of undesirable behaviours will arise, and eventually the strong will oppress, subjugate, enslave, or tyrannize over the weak. Even in small social groups, there are many unwritten rules, such as social taboos, which are strictly enforced by the members and which regulate their behaviour. Anyone who has studied the dismal record of our past, as it is recorded in the annals of history, when, for the very first time, such large groups of human beings began to appear, knows how often this has occurred. It is only recently, during the past few hundred years, that human beings have been able, by the slow process of trial and error, to develop a form of government and societal organization that has allowed them to overcome these innate human limitations, so that the majority of people are able to live lives that are free of the disorder, violence, oppression, injustice, and inequality that characterized large human populations in the past, and unfortunately still do characterize such populations in many parts of the world today.

The reason why many countries have adopted democratic governments, along with a legal and police system to ensure order, is to compensate for these two fundamental shortcomings in our nature: the fact that we do not care about the things, people, and places we don’t see and know personally, and our great difficulty in developing a natural, fair, and just social order for groups that contain more than a few hundred individuals. I believe that Abraham Lincoln understood these things when he spoke at Gettysburg in 1863, declaring that the bloody American Civil War was being fought in order to preserve an example of a successful, functioning democracy[3] for the rest of the world, in which those who have differences of opinion seek, and are usually able to find, ways to resolve those differences in a civilized manner, without resorting to violence or oppression.

Far from producing the best economic or social outcomes, when the free market is rendered blind, as it is whenever the distance between the producer and consumer is sufficiently great that the consumer has little or no idea who produced the things one consumes and in what manner they are produced, it can, and very often does, produce outcomes that no one except a free-market fanatic would describe as being ideal or desirable. Because it is difficult for us to care about the people, places, and organisms that we don’t know personally or see with our own eyes, it can happen that we can unknowingly or unintentionally cause harm to other people, places, or organisms by pursuing our narrow and selfish economic interests. In other words, besides the benevolent and mutually-beneficial Invisible Hand of commerce and economic activity which is so often talked about, and which brings to the market the things that people want and need at low prices, there is also an Invisible Fist, Sword, Club, or Chain that causes varying degrees of harm to the people, places, and organisms that are used to produce them, as well as to others who are harmed by industrial economic activities. In addition, there is also the Invisible Swindle, Embezzlement, Theft, Expropriation, Larceny, and Bomb, as in the case of unbridled financial or real estate speculation that can blow up an entire economy.

There are innumerable examples of these harmful effects all over the world. For example, the demand for cheapness in everything we consume has many harmful consequences, such as the dumping of sewage and toxic chemicals in the land, air, or water, underpaying workers in poor countries who work in unsafe or unsanitary conditions, the many millions of farmers who have lost their land and been put out of work by global free trade, using fishing methods that destroy the ocean floor or have seriously depleted marine life, or mistreating animals due to the barbaric practice of industrial animal farming. Collectively, because we have become so numerous and our appetite for things is constantly increasing, we are changing the composition of the Earth’s atmosphere, while the oceans are becoming more polluted and acidic, both of which changes are making it increasingly difficult for many species to survive. Because these human-caused changes are occurring at a much higher rate than the rate at which such changes typically occur – over periods measured in hundreds or thousands of years or longer, it is simply not possible for biological evolution to keep up with or adapt to them, so that many species are becoming extinct. All of these effects of economic activity are also not intended, but no one would agree that they are good, right, or beneficial. Together, they form the bad, but equally important, side of Smith’s Invisible Hand.

Free-market fanatics argue that we should never interfere with the operations of the Invisible Hand because, according to them, the monetary incentives that can be reaped by producing the things people want and need are sufficient to ensure that merchants will be honest, producers will be diligent, workers will be industrious, owners and employers will be fair, just, and conscientious, corporate executives will behave responsibly, the cows will be plentiful, the plants and trees will be fruitful, the sun will be radiant, the rain will be abundant, the weather will be predictable, and the Heavens will be kind and merciful. According to these deluded fanatics, provided that competition is allowed to produce its beneficial effects, there is no need to interfere in the market at any time or for any reason.

But apart from the many harmful effects of what I have called the Invisible Fist, Sword, Club, or Chain, there are also the many harmful effects of the Greedy, Grasping Fingers of Corporate Tyranny, as well as the dangerously destabilizing effects of financial speculation, which are increasingly prominent and problematic all over the world. To check, correct, balance, and compensate for these harmful effects, any sensible person would agree that we also need the Guiding, Restraining, and, when necessary, the Punishing Hand of Government.

Friedrich Hayek was one of the many free-market fanatics who declared that the adoption of socialist policies in democratic countries would lead inevitably to totalitarianism. In doing so, he made the mistake of lumping together socialist policies, such as public health care and education, welfare programs, and old-age pensions, that were adopted and implemented in democratic countries by the legitimate democratic process of majority rule with the same policies that were imposed on the inhabitants of communist countries. While the first were the result of a democratically-reached consensus, and therefore could later be revoked or modified if the majority so desired, the second were imposed on the people, who were given no vote or say in the matter, by their rulers, who generally paid no heed to what the people wanted and, in some cases, needed. In other words, Hayek failed completely to recognize the important distinction between the Guiding Hand of democratic government and the Iron Fist of communism and fascism, or the less rigid and oppressive Gloved Fist of socialism. In his addled and highly biased brain, these two superficially similar but fundamentally different things were regarded as being one and the same, probably because he felt the same degree of contempt towards both of them.

Contrary to what the free-market capitalists believe, behaving in the selfish manner that Smith advocated in his discussion of the Invisible Hand does not always lead to the best possible social or economic outcome. Unlike these fanatics, Smith recognized the many harmful effects of human selfishness and the need to check or correct these effects.

Of course, Adam Smith was no utopian. He was keenly aware of the limitations of the “invisible hand” – and therefore understood that effective institutional infrastructure is required to ensure the operation of a free and fair market. Unfettered markets tended towards monopoly, he wrote, and so proportionate government action is needed to create a clear and stable framework that enables free competition to take place.[4]

When Smith argued that self interest gives rise to unintended benefits to society, it was in the context of competitive markets, property rights, social capital, and basic institutions of justice. The invisible hand does not mean greed or selfishness, which were behaviours Smith denounced. Nor does the invisible hand mean market efficiency (a modern view). The invisible hand is at work in any institutional setting, even one of central planning (in which people instinctively compete for resources in an inefficient, and likely unfair, process). The human instincts that comprise the invisible hand can be a destructive force in the wrong institutional setting, and must be controlled by a decentralizing power, such as democracy or economic competition.[5]

In Smith’s less frequently quoted book, The Theory of Moral Sentiments, which he regarded as being a more important work than his later, more celebrated An Inquiry into the Nature and Causes of the Wealth of Nations, he advocated the practice of what he called the social virtue of sympathy, or caring for others.

Though he lauded self-interest in the economic realm, Smith also celebrated the natural concern people felt for the welfare of others, which he called “sympathy.” Smith drew a distinction between self-interest and what he called “the soft, the gentle, the amiable virtues.” These two sets of values existed in a delicate balance, he argued, and “to restrain our selfish, and indulge our benevolent affections, constitutes the perfection of human nature.”[6]

In other words, to continue quoting the passage regarding the Invisible Hand from one of Smith’s works, while neglecting to mention his comments on the importance of sympathy, or empathy, as we would today call it, and other social virtues, is to present an incomplete and highly distorted version of his beliefs.

It is imperative that we cease believing the nonsense that is espoused by the advocates of the Invisible Hand, for there are many other forces and features which can produce harmful unintended effects, and which these naive fanatics have overlooked or regard as unimportant. To correct, check, and counter these undesirable forces and effects, our forefathers, through their toil, trouble, foresight, and sacrifice, have developed the system of democratic government, to be a shining beacon to light, dispel, and check the darker, ignorant, selfish, indifferent, and less generous side of our human nature.

[1] I suspect the primary reason for this overly simplistic conception of the badness of all governments and the goodness of private enterprise is due to the classical economists’ analysis of monopoly and perfect competition. Since governments are in a sense legal monopolies, many people who have studied this basic economic paradigm in school have concluded that, by their very nature, governments will exhibit many of the defects of monopoly. However, there are numerous real-world instances where this simplistic analysis is wrong or does not accord with reality.

[2] The first feature is discussed in “What You See is What You Know,” while the second feature is discussed in “The Breakdown of the Social Bond” and “The Myth of Individualism.”

[3] Ever since the presidency of Ronald Reagan, the American democracy has become more polarized, dysfunctional, corrupted by money, and largely controlled by the rich for the promotion and protection of their selfish interests. It no longer is – and should not be considered by anyone as – an ideal or even a good example of democratic government. This degeneration is in large part due to the harmful influence of the totalitarian intellectual named Ayn Rand, and her obedient acolyte, Alan Greenspan, who sought, during his lengthy tenure as the U.S. Federal Reserve Chairman, to implement her free-market principles as widely as possible.

[4]The Wealth of Nations by Adam Smith, from the Foreword by George Osborne. Harriman House, Petersfield, Hampshire, 2007.